redemption of debenture

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Slide 1:

Pr e sentatio n On Re demption Of De bent ure Mohit Jaiswal By :

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Introduction A company raises its capital by means of issue of shares. But the funds raised by the issue of shares are seldom adequate to meet their long- term financial needs of a company. Hence, most companies turn to raising long-term funds also through debentures.

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What is debenture..? A debenture is like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become Share Capital.

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Difference with shares… Debenture Holders (D.H.) are the creditors of the company and not the owners. 2.Interest out of profit is given on debentures and not the share in profits. 3.D.H. are given priority while giving payments in case of liquidation of a company.

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Redemption of debenture When a company Discharges the liability of a debenture holders, it is said “Redemption of Debenture”. Debenture are the long term loans of a company, hence the debenture holders must be paid back for the loans given to the company. Thus, redemption of debentures means discharge of liability of debentures by repayment to the debenture holders.

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Methods of Redemption of debenture By Payment In Lump Sum By Payment In installments By Purchase In Open Market

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Methods of Redemption of debenture By payment in Lump Sum Under this method, the payments of entire debenture debts is made in one lot at the expiry of a specific period (i.e., at maturity) or even before the expiry of the specified period after passing specified resolution at the meeting of debenture holders.

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Under this method, the payments of specified portion of debentures debt is made in installments at specified intervals/ dates. For example a debenture of Rs 100 may be discharge as given below: 20% or Rs 20 on 1.1.2005 20% or Rs 20 on 1.1.2006 25% or Rs 25 on 1.1.2007 35% or Rs 35 on 1.1.2008 By payments in Installments

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As per The Companies Act a company can redeemed its debenture by purchasing its own debentures from the open market. The act of purchasing the debenture is canceling the debenture. By Purchase in Open Market

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Sources of funds for Redemption of Debentures Out of Capital Out of Profit Fresh Issue Of Shares/ Debenture By Conversion Into Shares

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In this, a company accumulates some part of its profits over the years. Redemption of Debenture is made out of this accumulated profits. For using the funds lo accumulated profits for redemption, it is necessary to create ‘ Debenture Redemption Reserve A/c ’ by transferring accumulated profits. REDEMPTION OUT OF PROFITS

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When Debentures are redeemed without utilizing profits it is called redemption out of Capital. But as per the guidelines of SEBI, debenture can not be redeemed fully out of capital. The government of India has indirectly placed restrictions on this method by requiring every company to create a DRR equivalent to at least 50% of the amount of outstanding. It means that now only 50% of redemption may be carried out of capital. REDEMPTION OUT OF CAPITAL

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A company arranges funds by issuing new shares or debentures. The funds raised from this new issue is used to redeem the debenture. Due to redemption by this method, no adverse effect is seen on the financial position of the company. REDEMPTION OUT OF FRESH ISSUE OF SHARES/DEBENTURES

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Redemption by conversion means redeeming the debentures by converting them into new class of shares. However, the debenture holders would exercise their right of conversion only when they find it beneficial from their viewpoint or as agreed as per terms of issue. REDEMPTION BY CONVERSION

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Debenture Redemption Reserve Company issue debenture when they need large amount of funds. Therefore when they have to redeem the debentures, they also need good amount of money. To ensure the availability of sufficient cash at the end of specified period without disturbing the normal business, companies set aside a part of profit by creating ‘Debenture Redemption fund’.

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GUIDELINES ISSUED BY SEBI: Every company shall create a DRR for the redemption of debentures, & it should be create before redemption start. The amount credited to the DRR shall not be utilized by the company except for the redemption of debenture. At least 50% of the debenture issue must be transfer to DRR before redemption commence. In creation of DRR

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GUIDELINES ISSUED BY SEBI: 4. All infrastructure companies, wholly engaged in the business related to development, maintenance and operation of infrastructure facilities and 5. Companies issuing debentures having maturity period of not more than 18 months are exempted to create DRR as per SEBI guidelines.

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CONCLUSION... Method and the time of redemption is always mentioned clearly at the time of issue of debentures. Only Convertible Debentures can be redeemed through conversion into new shares. Redemption can also be made out of current sources at the time of redemption like cash in hand, or by sale of assets however almost no company follow this method of redemption now a days.

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GOOD BYEEE Thank You… Thank You... Any Questions..????